The markets are abuzz with news of rising commodity prices and increasing profitability in gold mining. But are these increases in financial values really an indication of a growth of value to the economy? It’s easy to get caught up in the hype of positive indicators and lose sight of whether or not these changes will actually be of any fundamental benefit to South Africa.
Gold profitability is up, but only due to an increase in the gold price as global investors hedge against risk in the equities market and the rand devalues against the dollar. The spot prices of iron ore rose by 19 percent on Monday – the largest increase in one day in the history of the index.
But it is little solace to the primary sector in South Africa that is struggling with volatility and rising labour costs. According to economist Mike Schussler, the price of iron ore would need to quadruple in rand terms to stop the retrenchments that are taking place in certain areas of the Northern Cape. To grow in a meaningful way the South African economy needs to focus on activities that truly add value. Not just financial value but tangible value – the process of taking something and making it more useful than it was before.
A narrow example
For example, a property trader may find a good deal and buy a piece of ground at R1 million only to sell it three months later for R2m. The financial value of the land has increased, but unless the soil has been tilled or new buildings have been built, the piece of land is still providing exactly the same service to society as it was before.
This is a very narrow example but the same separation of value needs to be applied to industries where the value add is both consequential and simply financial.
Take the example of a bottle of wine sold in a restaurant. According to a report published by PwC, the average bulk sale price per 750ml of wine in 2012 was R3.75. When you go to a restaurant and order a bottle of wine you are likely to tip the waiter 10 percent. If the bottle costs more than R38, the waiter then earns more from the bottle of wine than the winemaker, despite having added far less value to the product.
Both winemaker and waiter add value – one by producing the product and the other by offering a service. It is a clear case of how the tangible value added to the economy and society cannot be measured by the financial value that is generated. The winemaker is creating jobs, building infrastructure, developing skills and knowledge and making extensive use of suppliers and other businesses. The waiter is walking from the fridge to the table, yet the waiter generates more financial value than the winemaker. The same comparison can be applied to various sectors in the economy. The extraction of commodities, for example, does not add the same true value to the economy per rand as manufacturing.
Iron ore in the ground is useless and the South African economy benefits by extracting it and selling it on. Businesses are engaged, employment is created and a product that could not add value to anyone is turned into a form in which it can be used.
But immediately after extraction the value of commodities – and in turn the South African economy – are highly sensitive to fluctuations in the market. These fluctuations are not a representation of the productivity or use of the commodity – when the price of iron ore shoots up from $53 to $63 per ton, it is still the same iron ore. The price fluctuations are driven by speculators taking bets on the future movements in supply and demand. They are taking a guess on how others will perceive the value of iron ore.
To stabilise the economy and create meaningful growth, South Africa needs to direct its production capacity to products and services according to their impact rather than their financial value. Reducing South Africa’s reliance on commodities will shield it from volatility but it will also help the economy to build wealth in ways that help the people on the ground.